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Eric Fry, waxing sentimental about gold and silver, reports...
"When an asset class becomes as reviled as precious metals are currently," we remarked last week, "that asset class is usually very close to becoming an excellent 'Buy.'"
Two days ago, the precious metals became a "Buy"... at least they became a "Buy" to Sprott Asset Management. The Canadian investment management firm offered to buy $1 billion worth of gold and silver bullion funds.
Notwithstanding this $1 billion vote of confidence, the prevailing sentiment toward precious metals is still pretty awful. Investor attitudes on gold and silver range from scorn to loathing... as the chart below makes very clear.
Since mid-2011, investors have redeemed about 20 million ounces' worth of gold from the SPDR Gold Trust (NYSE: GLD) - or roughly $50 billion worth.
The negative sentiment toward gold and silver will not change in a day, but we would not be surprised if Sprott's purchase marked the day the negative sentiment started to change.
The Sprott Heard Round the World
"The gold market is awash in bad news... and that might be the only good news for gold investors," we observed six months ago. "The somewhat precious metal has become so universally despised that very few 'haters' are still around to sell it. Eventually, someone might actually dare to buy it."
Two days ago, someone dared to buy it... and dared to buy silver also. Sprott Asset Management launched a takeover bid for both the Central GoldTrust (NYSE: GTU) and the Silver Bullion Trust (OTC: SVRZF).
This little vote of confidence for gold and silver arrives in the midst of a precious metals sector that has known only pessimism and despair.
One year ago, for example, James Grant, editor of Grant's Interest Rate Observer, remarked, "As we read the... consensus of investment sentiment, people love stocks, hate bonds and feel sorry for gold." Grant's description of the prevailing sentiment was dead-on... except that the sentiment toward gold was much worse than mere pity.
Unlike most other investments, gold does not merely fall out of favor; it tumbles into revulsion. The financial "experts" never pass up an opportunity to condemn mankind's oldest and most reliable form of money as a "barbarous relic."
Unfortunately, as 2014 progressed, gold and gold-mining stocks continued to regress, and investor attitudes toward the precious metals became ever more hostile. Finally, toward the end of 2014, gold had become such a pariah that we observed:
If gold were a graduating high school senior, it would probably be named, "least likely to succeed." Almost no one likes this forlorn asset. And even if they like it enough to pierce it through their ears or belly buttons, they still don't trust it as an investment.
The chart bellows tells the tale:
It tracks the price of the Central GoldTrust (NYSE: GTU), relative to its net asset value (NAV). (Unlike a typical mutual fund, which always trades precisely at NAV, Central GoldTrust is a closed-end fund, which means that its price can veer above or below its NAV, depending on investor demand for its shares). At the top of the gold market in 2011, the price of Central GoldTrust was about 9% above its NAV. In other words, investors were paying $1.09 for every $1 worth of gold in the fund.
Today, the price of Central GoldTrust is about 9% below its NAV, which means that a buyer of Central GoldTrust pays only $0.91 for every $1 of gold in the fund. That's what pessimism looks like!
But two days ago, we discovered what optimism looks like in the Sprott takeover bid. And just like that, both stocks popped and their discounts-to-NAVs closed.
Prior to the takeover announcement, Central GoldTrust was trading 7.6% below its NAV and Silver Bullion Trust was trading 10.9% below. In both cases, Sprott agreed to pay the full NAV to buy the funds. It was not the discount it was after; it was the gold and silver funds themselves.
Sprott hopes to merge the Central GoldTrust into its Sprott Physical Gold Trust and merge the Silver Bullion Trust into its Sprott Physical Silver Trust. If successful, Sprott would have increased its assets under management by nearly $1 billion.
Sprott's takeover offer is one small vote of confidence for the beleaguered precious metals sector... but we doubt it will be the last. For one thing, the precious metals have become noticeably less horrible over the last few months.
The gold-mining sector may not be dazzling investors just yet, but neither is it destroying them. In fact, since we published our "Gold 'On Sale'" column last November (the column that highlighted Central GoldTrust), the Market Vectors Gold Miners ETF (NYSE: GDX) has gained 10%, which is double the gain of the S&P 500 over the same time frame.
All fires begin with a spark.
Cheers,
Eric J. Fry
for The Non-Dollar Report
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